Swiss Re Analyzes Benefits of ‘Sustainable Agricultural Insurance’

January 9, 2009

“Agricultural insurance plays an important role in stimulating investment in agriculture and in stabilizing farmers’ income,” concludes a recently issued report from Swiss Re.

The report, “Setting up sustainable agricultural insurance: the example of China,” suggests that the country’s experience with agricultural insurance subsidies could point the way for other emerging markets to drive growth and secure food supply.

It also recommends that “all stakeholders in the agricultural insurance sector collaborate to ensure risk-adequate pricing and to develop viable risk assessment procedures and solutions for local markets.”

“China is one of the fastest growing economies in the world and one of the major agricultural producers,” Swiss Re continued. “As demand for food is rising to satisfy an increasingly affluent population, the country is also facing the growing challenge of securing the necessary food supply in the face of events such as floods, typhoons, droughts or epidemic livestock diseases.”

Subsidies spur significant growth in agricultural insurance
Swiss Re pointed out that China recognized “the importance of the agricultural sector for its economy and social stability.” It introduced subsidies for agricultural insurance in 2007, making insurance protection more affordable to large groups of farmers. “The subsidies spurred an instant demand, generating premiums to a value of $800 million in 2007. In 2008, premiums are expected to reach an impressive $1.8 billion, which makes China the second biggest market for agricultural insurance after the United States. Further growth can be expected in the coming years.”

Roman Hohl, Co-Head Agriculture of Swiss Re, and one of the authors of the report, stated: “China’s use of agricultural insurance as an incentive for farmers to expand agricultural production, and its efforts to develop a robust agricultural insurance industry, is a good example for other emerging markets that currently lack such a framework.”

Creating a robust agricultural insurance market
“While the introduction of subsidies has given agricultural insurance a broader base, the challenge remains to create a robust market able to cover a large variety of crops, different climatic regions as well as China’s predominantly small-scale farming operations,” Swiss Re continued.

“Access to the domestic and global reinsurance market is helping Chinese insurers to absorb peak risks. China is now also seeking to benefit more from the global experience and know-how of international reinsurers with dedicated agricultural specialists.” Swiss Re is one of the companies that has been approached by Chinese insurers and local governments.

Agostino Galvagni, Head of Insurance & Specialty at Swiss Re, explained: “In view of the diverse agricultural conditions there can be no one-sizefits- all solution for the whole of China. However, Swiss Re has the experience and know-how to help create the structures that could nurture a sustainable insurance system, and further, assist the country in addressing the priorities of their agricultural development program in an efficient way.”

Juerg Trueb, Swiss Re’s Head of Environmental and Commodity Markets, added: “With its profound risk management expertise, Swiss Re can also assist in developing solutions to issues where conventional agricultural insurance is difficult to implement. Solutions can include index-based structures covering volume and price risks,” said.

In conclusion, the Focus Report calls for all stakeholders in the agricultural insurance sector to collaborate to gather the necessary loss information that would allow for risk-adequate pricing of insurance products at the local level, and to develop viable loss assessment procedures. Both of these belong to the challenges that need to be addressed, to make the burgeoning agricultural insurance market in China truly robust.

A copy of the full report and additional information is available on the Group’s web site at: www.swissre.com.

Source: Swiss Re

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